Are There Any Doors Open for the Fed?

Jim Willie, AKA the Jackass, thinks we're like Japan only worse.

Japan has proved without confusion that 0% is a permanent stuck position. The United States will repeat the path, but with a vast mudslide. Japan has had the advantage of a strong industrial base, a sizeable trade surplus, and no war budget. Thus it has been capable of funding much of its own deficits. It does possess a big debt burden. But the US has $1 of new debt for every $1 in government revenue. The US war budget is almost as large as its total revenue. The US depends upon foreign creditors, many of whom have been thoroughly alienated.

Read the rest.

Where is gold going in the near term?

No one knows for sure, of course, especially in the case of gold, since there is evidence of and rational grounds for suspecting government price suppression of both gold and silver.

In attempt to anticipate where gold might go, Jeff Clark of Casey's Gold and Research Report has looked at some possibilities. If the price of gold matches the 23.5% average of price surges since 2001, gold would hit $1,428 in the current run-up. If it matches the maximum surge of 35.5% since 2001, it would settle at around $1,567.

Regardless of what gold does over the next few months, I think 20%+ surges will continue throughout this bull market, with the occasional 30% punch. And a doubling of the gold price in a matter of months is also likely in our future, a sure sign of the Mania phase. Gold surged 128.5% from October 8, 1979, to January 21, 1980. A similar vault today would have the price jumping from, say, $2,400, to $5,484 in less than four months. Yes, I think that's entirely possible and perhaps probable.

How high will gold ultimately go? I look at it this way. The sovereign debt crisis in Europe isn't over. The sovereign debt crisis in the U.S. hasn't started. We will almost certainly see more quantitative easing (i.e., money printing). We have artificially low interest rates. The U.S. dollar is basically at the same level it was two years ago. We have no official inflation and certainly no big inflation. Less than 5% of U.S. citizens own any form of gold. Central banks are widely expected to be net buyers of gold again this year. Investment demand for gold is still only 32% of all uses of gold, a far cry from the 54% level reached in 1979. I could go on, but you get the idea.

The only way you can benefit from these surges is to be long gold. If you haven't been a part of one, I guarantee you it's a lot of fun. Gold is more important than that, of course; it's your personal safe-haven asset. Buy on pullbacks, slowly increasing your holdings so that what you own makes a difference in your portfolio, both for asset protection and profit potential.

And then, hang on.

How much gold and silver do you own?

Fighting Your Enemy by Building Him Up

As Adrian Ash notes, countries that wanted to destroy their enemies would secretly inflate their enemies' money - printing tons more of it - to ruin their economies and thus impair their ability to defend themselves. The British did it to the infant U.S. states, you will recall, during the American Revolution.

Weakening the enemies' currency is out in this Alice in Wonderland fiat world. Now the strategy is the exact opposite.

Japan is seething over China's recent mass-purchases of the Yen. Quoting Peking's finance minister, Michael Pettis, Ash writes that "China's Yen purchases this year equal $27 billion, more than six times China's combined Yen buying in the previous five years."

"Everyone is playing the same game," says Pettis – "trying to force the brunt of the adjustment abroad...and here we have China and Japan squabbling over Chinese attempts to recycle its trade surplus into Japan rather than into the US or Europe."

China buys the Yen, thus hurting Japanese exports...and so Japan buys up Dollars...which are already devalued by the US Fed's zero-rate policy, and are now pulling ahead of the Yen in the race to the bottom. Over in Europe, the Swiss National Bank sold its own Francs for Euros in the spring of this year, while the Bank of England's photon forgery team finished flooding the City of London with Pounds, creating enough money to fund an entire year of government borrowing and pushing consumer-price inflation above its own "upper tolerance" in 19 of the last 36 months with its own near-zero rates.

"The intervention is positive for the [US] Treasuries market, especially short-dated issues which Japan will likely focus on," Reuters quotes one market strategist today. Which sounds a sweet deal for the Fed's campaign to destroy Dollar savers. But nobody wins this war of attrition, however much money they print up and spend.

Rumor says Tokyo threw ¥500bn or perhaps ¥1 trillion at the Dollar on Wednesday. At that rate, it's got another 34 days to go before matching the 2003-2004 campaign, when Japan tried to defend the Dollar above ¥100. It's since slipped a further ¥17 regardless, and ¥80 has become the "line in the sand" according to currency traders.

There's money to be made here, of course, either fighting the Fed or supporting the rear-guard action in Tokyo. But in the absence of strong consumer demand at home, central-bank policy the world over is dead set on weakening the local currency – wherever you live – in a bid to win market-share in exports, no matter the cost.

Investors and savers wanting a flak jacket just pushed gold to new Dollar highs, with silver hitting its best level in almost three decades. No, they're not guaranteed to keep rising, but it's hard to see them falling too far when policy worldwide turns to actively denting the value of cash. At least no one can create precious metals at will – unlike the Yen, Dollar or Swissie – simply to shell them into the market in a war everyone loses.

Gold: Demand Growing, But Not Supply

In a weekend commentary, Przemyslaw Radomski writes:

Gold prices are rising from the long-term perspective and it’s no wonder. Central banks that had one time liked nothing better than to get rid of their gold reserves, are amassing major gold positions. The International Monetary Fund said last week that it sold 10 metric tons of gold to the central bank of Bangladesh raising $403 million. The IMF has already sold 212 tons of gold to the Reserve Bank of India, the Bank of Mauritius and the central bank of Sri Lanka, all in November last year.

So far in 2010 Russia has increased its gold holdings by 2.8 million ounces, $3.6 billion at current prices giving the Russian government a total of almost $30 billion. Saudi Arabia and the Philippines have disclosed new gold buying in 2010, plus India, Sri Lanka and Mauritius bought gold in 2009. We know that the People's Bank of China is also is a major accumulator of gold, gobbling up its local mining production in hopes of having a hedge for its huge mountain of fiat currency reserves.

It seems that demand for gold is rising faster than supply. Mine production has remained flat even as investor demand more than doubled so far in 2010 compared to a year earlier.

Looking back at recent history the best year for mine production was in 1999 when 83.69 million ounces of new gold came out of the ground. Keep in mind that in that year the price of gold was under $300, hitting a low of $256. (That was the year that the luckless former British Prime Minister Gordon Brown ordered the sale of Britain’s gold reserves.)

It doesn’t take a degree in economics to understand that if the price of something soars by some 350% you would want to dig more of it out of the ground and sell it. But last year’s mining production hit only 74.46 million ounces, still not enough to surpass 1999's output. So we’re not seeing dramatic increases in mine production. Central banks around the world who were permitted under an international agreement to sell a combined 200 tonnes per year, are not even selling an ounce. Just the opposite--they are net buyers rather than sellers.

Scrap gold (people’s old jewelry etc.,) is another source of gold coming to the market.

Over the last few years, since the financial crises unfolded and gold prices have gone up, people have been lured by advertisements on late-night television to take out their old gold jewelry and sell it for a profit. So that in 2008, while new mine production barely inched up by 1.38%, scrap gold soared by 34%.

But is scrap gold a never ending supply? There is a limit to the number of grandma’s old gold rings people can sell. World Gold Council figures for the first quarter of 2010 show that scrap sales for this period were 11.03 million ounces, a 43% fall from the first quarter of 2009. Demand is growing but supply isn’t. Again, you don’t need an advanced degree in economics to understand the long-term implications for the price of gold.

Dan Winters Shoots Bernanke

Who is this man with a vault door fronting his palatial office?


Why, of course - Time's Person of the Year, 2009. The man who saved the world from financial ruin.



And here at work we see the secret to his success.

Photos from Dan Winters, celebrity photographer.

The War on Wealth Generators

In his August 2 NY Times Op-Ed "Welcome to the Recovery," Timothy F. Geithner, head bureaucrat of the government's Treasury Department, claimed that

the recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

That's half-true. The actions of the government and Federal Reserve did prevent a deeper collapse. The false part is the claim that the economy is on "the road to recovery." The economy needed to correct the mistakes of the preceding boom, and the various stimulus programs only prevented this from happening.

Today's Labor Department employment figures are surprisingly good, considering the determination of the government and Federal Reserve to keep the recovery from happening. The LA Times reports that

Nearly 15 million workers were counted as jobless last month. Including people too discouraged to look for work and the nearly 9 million workers who have little choice but to work part-time, the rate of the nation's unemployed and underemployed stood at 16.7% last month, up from 16.5% in July.

Equally discouraging is the commentary by pundits. The article quotes the chief economist at the Conference Board, a business research group based in New York, who said that "The economy as a whole has been weakened by a dismal housing market and slow consumption."

Consumption does not build sound economies - savings and investment do. Before something can be consumed it must be produced, but production requires savings. What we need now is a high savings rate. It was unbridled consumption that helped fuel the collapse. Savings provides the capital needed to start new projects, which means new jobs. The economy needs to generate more wealth to employ people productively (as opposed to the Keynesian prescription of having people dig holes and fill them back in), but as Frank Shostak has written,

Over time a situation can emerge where, as a result of persistent loose monetary and fiscal policies, there are not enough wealth generators left. Consequently, generated real savings are not large enough to support an increase in economic activity.

Once this happens, the illusion of loose monetary and fiscal policies is shattered; real economic growth must come under pressure. Even in terms of GDP, it will be difficult to show economic growth.